The Best 529 Plans of 2016

Our research team reviewed 38 529 plans across 4 core metrics to see which states best help people save for college. The top three overall for 2016 were New York’s 529 College Savings Program, Utah’s Educational Savings Plan (UESP), and Michigan’s Education Savings Program.

Skip to Editor’s Awards to learn which 529 plans deserve special attention for their programs.

Overview of Research

Our team spent over 40 hours researching and narrowing down over 100 529 plans to a final group of 38 for this 2016 ranking. We then used key insights from our research to collect 13 types of data and categorize them into four core metrics. These metrics were weighted based on their values to an average person trying to save money for college. The four core metrics for our ranking, as identified by our research team, are: Past Performance (35%), Expenses (30%), Money Management (25%), and Ease of Use (10%).

Type in a 529 plan’s name to see if it made our rankings:

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Introduction to 529 Plans

What is a 529 Plan?

TheU.S. Securities and Exchange Commission explains: “A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.”

There are two main types of 529 plans: savings and prepaid.

A 529 savings plan allows for tax free savings for a college education: Earnings in 529 plans are not subject to federal taxes, and, depending on the plan, may be exempt from state taxes as well. However, the account holder will only earn these tax benefits if the funds withdrawn are used on an eligible college expense, such as tuition, textbooks, or room and board. A misuse of money in a 529 account is subject to taxes and incurs a 10% penalty.

There is no general requirement that an account holder lives in the same state as the plan selected. With a few exceptions, any plan from any state can be chosen and any college can be selected; regardless of which state the account holder lives in. One can live in Alabama, use a New York-based 529 plan, and send a child to school in Michigan.

With a prepaid plan, an account holder prepays all or part of the beneficiary’s future tuition. The advantage of a prepaid plan is that account holders only pay the amount the tuition costs at the time the money is deposited. This allows a prepaid plan to act as insurance against market fluctuations and increased costs. The advantage of a prepaid plan is that it guarantees a minimum rate of return. But this t does not necessarily entitle the account holder to any extra money the plan earns. Funds from prepaid plans also generally have to be used in-state. This means that the funds generate fees if the account beneficiary decides to go out of state for college.

Methodology

How we selected our test group

There are a myriad of options available to consumers when choosing a 529 plan. We have narrowed the selection from over 100 different plans to 38 to make our ranking as useful as possible.

In our vetting process, we started by eliminating plans that had geographical limitations or requirements. This allows our rankings to be useful regardless of a potential account holder’s state of residence.

We also eliminated plans that were sold through advisors instead of directly to the purchaser. Those plans have additional fees added to pay for the advisor and so are not usually the best bang for the buck. The advantage of an advisor sold plan is that the advisor will help throughout the process of selecting the right investment options and managing funds. However, our research indicates that usually the extra benefits advisors bring to an account do not offset the cost of hiring them. Unless you’re particularly uncomfortable with investing money on your own, we recommend steering clear of advisor sold plans.

To narrow our search further, we excluded prepaid plans from our rankings. This was so that our rankings were not dependent on the location of the account holder.

Some 529 plans are either too new or too recently changed to get accurate performance data. These plans were excluded from our consideration.

How we selected which data to use in our methodology

We started by reviewing existing rankings on 529 plans, such as Savingforcollege’s plan performance rankings, or Morningstar’s Best 529 College-Savings Plans for 2015. These rankings were a good start for our research, but Savingforcollege was too focused on past performance for our liking because it is a statistic that doesn’t take into account some of the other decisions one has to make when choosing a 529 plan. Morningstar, on the other hand, considered a wider range of metrics but weren’t as transparent with how they reached their final decisions. Both sites have a wealth of guides and information on choosing a 529 plan; we recommend checking them out if you want more information about college savings programs but keep in mind these limitations.

We then expanded our search to 529 plan websites to see what information was available to the public. After spending time deciphering what reliable data was available for a majority of 529 plans, we chose 4 core metrics as the best way to evaluate the plans. These included Past Performance, Expenses, Money Management and Ease of Use. All information was gathered directly from official 529 plan websites, such asHI529 orTexas College Savings.

There are a few drawbacks to this method. One important consideration in choosing a 529 plan is that some plans offer state tax incentives. However, these incentives only apply to people living in the same state as the plan. This means that for people living in the other 49 states, these incentives are meaningless. We thought that creating a metric that includes state tax incentives would confuse the ranking, because only certain plan’s tax breaks would apply to any particular person.

We grouped our 13 key data points as sub-metrics into four core metrics. This was to simplify how we would calculate our rankings and allow us to weight the metrics depending on how important they are to the evaluation of the various 529 plans.

Since the most important feature of a 529 plan is how much money it generates for an account holder, we chose Past Performance and Expenses as our most important core metrics. While there is no guarantee that trends will continue, Past Performance gives the best idea of how well an account holder’s money will mature with time. Expenses, especially recurring expenses, determine how much a user pays to maintain a 529 account. This can offset performance, directly impacting how much money an account will generate for the account holder.

Our methodology breakdown:

Past Performance (35%)

1 Year Average Annual Total Returns

3 Year Average Annual Total Returns

5 Year Average Annual Total Returns

Year Average Annual Total Returns Since Inception

Expenses (30%)

Minimum Asset-Based Expense Ratio

Maximum Asset-Based Expense Ratio

Money Management (25%)

Investment Options

Minimum Monthly Contribution Amounts

Maximum Total Deposit Amount

Ease of Use (10%)

Setting Up Account

Automatic Payments

Participant/Owner Change Policy

Ease of Contact

How we scored our methodology

Each core metric was assigned a maximum score of 10 that was determined by averaging all its sub-metric scores. The sub-metrics were grouped into their core metrics and their scores were determined by ranking each plan against each of the other 37 plans in that sub-metric. The plan with the best performance in that sub-metric was awarded a 10. The plan with the lowest performance was given a score dependent on how many states scored in that sub-metric.

For example, in the sub-metric minimum asset-based expense ratio, Maine’s Nextgen College Investing Plan was the cheapest with an expense minimum of 0% annually and was awarded a 10 for that sub-metric. North Dakota’s College Save was the most expensive with a minimum expense of 0.85% annually and received a 0.26. The final core metric scores were determined by averaging each sub-metric score (so all sub-metrics were weighted evenly).

Here’s an example of how our #1 overall plan, New York’s 529 College Savings Program, scored an 8.54/10 for the core metric Past Performance. The Past Performance metric is made up of four sub-metrics; here’s how New York’s 529 College Savings Program scored for each one:

1 Year Average Annual Total Returns – 5.8/10

3 Year Average Annual Total Returns – 9.5/10

5 Year Average Annual Total Returns – 9.4/10

Year Average Annual Total Returns Since Inception – 9.5/10

Once the sub-metrics were averaged, we took each plan’s score on the four core metrics, applied the weights detailed in the previous section, and calculated the end ranking.

Understanding Our Metrics

What is important in a 529 plan and why?

The metric Past Performance ranks plans based on their historical return on investment. The historical performance of a plan can indicate how a plan will do in the future. This metric is very important because financial gains are the most important aspect to consider when choosing a 529 plan. Our Past Performance sub-metrics rank plans based on the average annual returns from four different time frames: 1 year, 3 year, 5 year, and returns since inception. The plans with highest returns scored the highest for each sub-metric.

Limitations: because we averaged the performance of each plan, there are inevitably some investment options for each plan that performed better than our rankings might indicate. However, given the unpredictable nature of investments, we felt an average gives the best indication of the plan’s overall performance.

Highest Scoring Plans in Past Performance

Expenses ranks plans based on how much money it costs to maintain the account. These are usually calculated as a percentage of the account’s worth. This metric is rated highly because along with the performance of the account’s investments, they directly influence how much a 529 account is worth.

We divided Expenses into two sub-metrics: minimum asset-based expense ratio and maximum asset-based expense ratio. An asset-based expense ratio is an annual fee that is charged to account holders based on the amount of funds present in the account. Expense ratios for 529 plans are usually around or below 1%. While this number seems low, even little differences can add up to large amounts over 10 or 15 years of spending as it impacts compounding interest. The minimum asset-based expense ratio sub-metric ranks plans based on the theoretical minimum a plan will charge yearly, while the maximum asset-based expense ratio sub-metric ranks plans based on the theoretical maximum a plan will charge yearly. The plans with lower costs ranked higher on our list.

A handful of plans have an account startup fee. The amounts are so insubstantial compared to the funds required to pay for an education that we decided not to include them in our ranking.

Highest Scoring Plans in Expenses

Money Management is an indicator of the account holder’s control over their money. This is an important metric because it keeps power in the hands of the account holder. The three sub-metrics we have selected for Money Management are: number of investment options, minimum monthly contribution amounts, and maximum total deposit amounts.

The number of investment options ranks plans based on how many options an account holder has for investment. This gives account holders the ability to spend money how they choose. The plans with the most options received the highest scores in this sub-metric.

Minimum monthly contribution amounts compares plans based on the smallest possible deposit amounts. The highest ranked states having the lowest deposit threshold. The lower deposit amounts allow account holders to spend exactly as much money as they want to. Finally, maximum total deposit amount looks at the plan’s total investment cap. Larger maximum amounts allow account holders to deposit more money and receive benefits for longer. The states with the largest allowed investment received the highest score here.

Highest Scoring Plans in Money Management

For Ease of Use, we wanted to measure how easy each plan was to set up and make payments into. This is the least important metric because it does not affect account finances directly. While this is an inherently subjective metric because some users may find different websites easier to use than others, we wanted to be as objective as possible when ranking this metric. We settled on four quantifiable data points: whether the account could be setup online, whether the payments could be made online, whether the account owner or beneficiary could be easily changed, and how many different ways plan officials could be contacted for support.

Online setup and payment streamline the process of setting up a 529 account. Online forms usually only require your name, address, birthday, and social security number, and the same for the beneficiary. The ability to change an account owner or beneficiary allows flexibility if personal plans change. Being able to easily contact support can simplify a decision to create a 529 plan. We ranked plans by how many points of contact they offered.

We were pleased with our findings in this ranking. We found that most plans, including automatic payments, could be set up entirely online. Along the same vein almost all of the plans allowed the account holder to change the account beneficiary or transfer account ownership. Many plans have active Twitter and Facebook pages where they can be contacted as well as phone and email. As such, most plans received high scores in this metric.

Highest Scoring Plans in Ease of Use

Editor's Awards

New York's 529 College Savings Program -- Direct Plan

With the best historical returns on investment, and the runner-up in Expenses, New York’s 529 College Savings Program is Ranking.com’s best 529 plan.

New York’s 529College Saving’s Program has the highest historical performance of any plan we ranked, with a commanding 6.43% yearly average return on 5 year plans, a 5.85% average on 3 year plans, only a -0.58% deficit in the first year, and a total yearly average of 6.39%. New York’s plan is also one of the cheapest plans to maintain. It has only a 0.16% maximum on its expense ratio.

Signing up for New York’s plan is as simple as visiting their website and entering your name, social security number, birthday, and the same for the account’s beneficiary. The website also has useful guides carefully explaining the different investment options. New York’s plan also offers tax deductions of up to $5,000 a year to New Yorkers ($10,000 to married couples filing jointly). Account holders are exempt from federal gift taxes for contributions up to $14,000 a year. And like the rest of the plans we reviewed, New York’s 529 program allows the beneficiary to use their funds at any eligible school in the US or abroad.

This should be your go-to for a 529 plan. Especially for those who live in a state that doesn’t offer state tax incentives.

Drawbacks:

New York’s 529 plan 1 year investment return is surpassed by many other plans

New York’s 529 plan Money Management Metric is only in the middle of the pack

We found other 529 plan websites easier to navigate

Ranking Results:

Past Performance 8.5/10

Expenses 9.1/10

Money Management 6.2/10

Ease of Use 9.2/10

Maine NextGen College Investing Plan

While Maine’s NextGen plan has a strong showing in each of the investments, it is the only state to provide the possibility of 0% asset-based expense ratio.

Maine’sNextGen College Investing Plan is 4th overall on our rankings. It has a strong showing in our core metrics Expenses and Ease of Use, although where NextGen stands out is its policy regarding minimum expenses. For its BlackRock Age-Based and NextGen Savings Portfolio, two of its investment options, it has zero program management fees. This makes it only plan we ranked with feeless options. In addition, NextGen’s maximum total deposit amount for the same beneficiary is $425,000, making it the 6th highest rated plan in this regard.

Maine’s NextGen investment plan also offers state tax incentives. But Maine residents should not feel pressured to take NextGen if another plan seems more appealing. Maine permits a deduction for contributions to out of state 529 plans.

Drawbacks:

Maine’s NextGen plan has a 25 dollar monthly minimum deposit amount, one of the highest we reviewed

While main is solid overall in Past Performance, it doesn’t stand out in any particular time frame.

Ranking Results:

Past Performance 6.6 /10

Expenses 8.3/10

Money Management 5.9/10

Ease of Use 8.3/10

Alabama CollegeCounts 529 Fund

While Alabama’s CollegeCounts 529 Fund isn’t on top of the pack, it has the most investment options of any plan.

Alabama ranks 10th overall in our 2016 ranking. High costs hold it back from a higher score, where it ranks 29th out of the 38 plans we reviewed. However, Alabama’s CollegeCounts plan shines in its wealth of investment options. It has three age-based options, six target portfolio options, and 26 individual fund portfolios for 37 total investment options. For perspective, the next best-ranked plan in this sub-metric, Nebraska’s Education Savings Trust, only has 23 investment options. Alabama also sets its minimum monthly investment at $0, allowing account holders to invest exactly as much as they want.

CollegeCounts also recently expand their list of qualified expenses to include computers, software, and internet access in addition to the normal expenses such as tuition. This gives account holders increased flexibility for how they spend their money. CollegeCounts also has one of the sleekest 529 websites we’ve seen.

Drawbacks:

Alabama’s CollegeCounts plan is one of the most expensive to maintain

Ranking Results:

Past Performance 7.1 /10

Expenses 3.4/10

Money Management 8.1/10

Ease of Use 9.2/10

Last Updated on July 6, 2016

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